Tencent's Financial Report: Transitioning from Old Money to New Money
Explore Tencent's latest financial performance, focusing on the shift from traditional revenue sources to emerging business models like video accounts and AI large models.
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“How can I turn ‘new’ money into ‘old’ money?”
This question from the film 一步之遥 (One Step Away) is applicable to nearly all organizations in transition. The definitions and interpretations of “old” and “new” money vary depending on the business sector and industry landscape. For instance, cloud providers transitioning from the mobile internet era to the era of large models are showcasing their AI-related revenue and growth rates in different ways within their financial reports.
At this juncture, a particularly prominent organization facing this transition is Tencent, with its focus on large models and WeChat video accounts.
On August 14, 2024, Tencent released its Q2 2024 financial report. The report shows that Tencent’s revenue for the quarter grew by 8% year-on-year to 161.117 billion yuan, with operating profit (Non-IFRS) reaching 58.443 billion yuan, and net profit increasing by 82% to 47.630 billion yuan. Notably, Tencent’s operating profit margin hit 31.5%, the highest since Q2 2016.
Despite achieving these results in a relatively tight market, the market response has been cautious. The high profit margin mentioned is largely attributed to Tencent’s mobile gaming engine, fueled by popular series like “全民” (全民) and “天天” (天天), which remains a core revenue driver for Tencent even after eight years.
The report reveals that Tencent’s value-added services revenue was 78.8 billion yuan, with domestic and international game revenue both growing by 9% to 34.6 billion yuan and 13.9 billion yuan respectively. The high-margin nature of these businesses is a key reason for Tencent’s significant profit performance.
However, compared to games, the market is more interested in seeing progress in WeChat’s video account ecosystem and the future potential of AI large models. In other words, Tencent’s revenue still mainly comes from the familiar “old money,” rather than the “new money” that could reveal its future direction.
Video Accounts Awaiting Transformation
“Optimistic peers have set this year’s GMV for video account e-commerce at a trillion-level. Yet, Tencent has not disclosed this data despite the 618 promotion, so we don’t know how ‘the hope of the village’ performs.”
Investor reactions reveal one reason for market caution. Besides the undisclosed GMV figures, Tencent has continued to withhold key data metrics like monthly active users and usage time, only providing vague information such as “significant growth in total user time for video accounts.”
We can only infer the growth potential of video accounts from advertising revenue data. Tencent’s network advertising revenue grew by 19% year-on-year to 29.871 billion yuan, with video accounts being a primary driver, alongside long videos.
Considering the strong private domain linkage of video accounts, its ad revenue and GMV ratio can be compared to Kuaishou. Tencent’s Q2 2023 earnings call revealed video account ad revenue exceeded 3 billion yuan, and assuming this figure grew to 15 billion yuan last year, we estimate the 2024 GMV for video accounts could be around 600 billion yuan, still far from the trillion-level target.
The slow pace of commercialization for video accounts may be due to inadequate e-commerce infrastructure. Observations show that before this financial report, video accounts have integrated with the WeChat ecosystem, including links to WeChat Mini Programs and new shopping entry points. However, these actions mainly focus on traffic distribution, with the e-commerce infrastructure still needing significant improvement.
Notably, video accounts have struggled with transitioning merchants from WeChat Mini Programs to video accounts, with merchants reporting higher service fees and longer payment terms, which complicates their business operations.
To B Isn't Enough, Ecosystem to the Rescue
While video accounts are gradually generating revenue, large models at Tencent still represent a significant cost center.
Tencent’s progress in both foundational models and consumer-facing products has been relatively slow. “混元” (Mix Yuan) was first introduced at Tencent’s Global Digital Ecosystem Conference in September 2023, and the large model app “元宝” (Yuanbao) only became available to users on May 30, 2024.
Tencent has not disclosed AI-related revenue, focusing on its strengths in product logic rather than rushing commercialization. The growing “new cost” in R&D spending is evident, with Tencent’s R&D expenditure increasing by 8% year-on-year to 17.277 billion yuan for the quarter, and 6% to 32.955 billion yuan for the half-year period.
The company’s investment in AI is also reflected in its hiring and salary increases for research personnel, indicating a strong commitment to AI development.
Despite widespread skepticism about AI commercialization and a cooling investment climate in AI, Tencent’s commitment to AI is evident in its talent acquisition and ecosystem integration. The integration of AI with Tencent’s existing ecosystem is becoming increasingly tight, with applications like Yuanbao leveraging WeChat’s content assets.
Finding the Next Benchmark?
Turning “new” money into “old” money is essentially a matter of perception, shifting external impressions from one benchmark to another.
For Tencent, establishing new benchmarks for video accounts and AI large models is crucial. While progress in video accounts shows promise with increasing advertising revenue, achieving significant breakthroughs in AI commercialization remains a challenge. Tencent’s focus on monetizing existing ecosystems while waiting for new revenue streams to mature illustrates a strategy of leveraging “old money” to support and nurture “new money” for future growth.
In summary, Tencent is navigating a transition from traditional revenue sources to new business models, with a clear focus on evolving its ecosystem and developing new revenue streams.
